Sideways 2006/07 wheat marketing-year price trend

At this writing, the Kansas City Board of Trade Decemberember wheat contract price is $4.84. One week ago, the December contract price closed at $4.59. Two consecutive closes below $4.60 and a downtrend would have been established. It will take two consecutive closes above $5 to establish an uptrend.

If on Oct. 5, the KCBT December wheat contract price is above $5, the 2006/07 marketing year (June 1 through May 31) price trend will be an uptrend. If on Oct. 5 the December wheat contract price is below $4.60, the trend will be down. If the price is between $4.60 and $5, the trend will be sideways. The odds are leaning toward, at the least, a sideways trend and possibly an uptrend.

Factors impacting the trend are current supply and demand conditions, wheat production expectations in the Southern Hemisphere and 2007 U.S. winter wheat planting conditions.

Ending stocks (wheat in storage at the end of the marketing year) may be used to summarize the supply and demand situation. In September's report, the USDA projected 2006/07 wheat marketing year wheat ending stocks to be 429 million bushels. This may be compared to 568 million bushels on May 31, 2006, and a five-year average of 580 million bushels. U.S. wheat ending stocks have not been this tight since the 1996/97 marketing year.

World wheat ending stocks are projected to be 4.6 billion bushels compared to 5.4 billion bushels last year and five-year average of 5.9 billion bushels. World wheat stocks have not been this low since the 1981/82 marketing year.

A better indicator of wheat stocks is the “stocks-to-use” ratio (ending stocks divided by annual use). The U.S. 2006/07 stocks-to-use ratio is projected to be 21 percent. This is the lowest since 1996. The world's stocks-to-use ratio is projected to be 20.5 percent. My records go back to 1960 and the closest was in 1965 when the ratio was 21.6 percent.

With tight stocks, the wheat price must remain sufficiently high to ration wheat and to guarantee enough planted wheat acres and thus production to meet demand.

Export demand is a big indicator of total U.S. wheat demand and will be the factor that changes the U.S. wheat ending stocks estimate. As of the week ending Sept. 14, all wheat sold for export was 23 percent behind last year and shipments were 37 percent less. The USDA projects that 2006/07 marketing year wheat exports will be 11 percent less than 2005/06 exports.

To meet USDA's 900 million bushel estimate, average weekly shipments must be 17.3 million bushels. To date, weekly shipments have averaged 15.7 million bushels. Between now and May 31, weekly shipments must average 18 million bushels.

Hard red winter (HRW) wheat export sales are 57 percent less than last year and shipments are 72 percent less. The USDA projects a 30 percent reduction in exports compared to last year. To date, weekly HRW export shipments have averaged 4.3 million bushels. To meet USDA's 300-million bushel export estimate, weekly shipments must average 6.4 million bushels.

Estimates for Argentina and Australia's wheat crops continue to Decemberline. If Argentina and Australia's wheat production potential continues to Decemberline, wheat prices will increase.

Given the market is offering about $4.50 for 2007 harvest wheat, planted acres should be as high as or higher than last year. Winter wheat HRW wheat planting conditions have improved even though short soil moisture conditions still persist and are a big concern.

I have been pessimistic about wheat prices reaching the July 11 high of nearly $5 during the 2006/07 marketing year. If USDA's export projections are correct, exports sales must increase and, to bid wheat out of storage, wheat prices must increase and could surpass $5.

If the KCBT December contract price is above $5 when reading this, the odds are high for $5-plus prices this marketing year.